Information about a Reporting Entit

Information about a Reporting Entity’s Economic Resources, Claims, and Changes in Resources and Claims
OB12. General purpose financial reports provide information about the financial position of a reporting entity, which is information about the entity’s economic resources and the claims against the reporting entity. Financial reports also provide information about the effects of transactions and other events that change a reporting entity’s economic resources and claims. Both types of information provide useful input for decisions about providing resources to an entity.
Economic Resources and Claims
OB13. Information about the nature and amounts of a reporting entity’s economic resources and claims can help users to identify the reporting entity’s financial strengths and weaknesses. That information can help users to assess the reporting entity’s liquidity and solvency, its needs for additional financing, and how successful it is likely to be in obtaining that financing. Information about priorities and payment requirements of existing claims helps users to predict how future cash flows will be distributed among those with a claim against the reporting entity.
OB14. Different types of economic resources affect a user’s assessment of the reporting entity’s prospects for future cash flows differently. Some future cash
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flows result directly from existing economic resources, such as accounts receivable. Other cash flows result from using several resources in combination to produce and market goods or services to customers. Although those cash flows cannot be identified with individual economic resources (or claims), users of financial reports need to know the nature and amount of the resources available for use in a reporting entity’s operations.
Changes in Economic Resources and Claims
OB15. Changes in a reporting entity’s economic resources and claims result from that entity’s financial performance (see paragraphs OB17–OB20) and from other events or transactions, such as issuing debt or equity instruments (see paragraph OB21). To properly assess the prospects for future cash flows from the reporting entity, users need to be able to distinguish between both of these changes.
OB16. Information about a reporting entity’s financial performance helps users to understand the return that the entity has produced on its economic resources. Information about the return the entity has produced provides an indication of how well management has discharged its responsibilities to make efficient and effective use of the reporting entity’s resources. Information about the variability and components of that return also is important, especially in assessing the uncertainty of future cash flows. Information about a reporting entity’s past financial performance and how its management discharged its responsibilities usually is helpful in predicting the entity’s future returns on its economic resources.
Financial Performance Reflected by Accrual Accounting
OB17. Accrual accounting depicts the effects of transactions, and other events and circumstances on a reporting entity’s economic resources and claims in the periods in which those effects occur, even if the resulting cash receipts and payments occur in a different period. This is important because information about a reporting entity’s economic resources and claims and changes in its economic resources and claims during a period provides a better basis for assessing the entity’s past and future performance than information solely about cash receipts and payments during that period.
OB18. Information about a reporting entity’s financial performance during a period, reflected by changes in its economic resources and claims other than by obtaining additional resources directly from investors and creditors (see paragraph OB21), is useful in assessing the entity’s past and future ability to generate net cash inflows. That information indicates the extent to which the reporting entity has increased its available economic resources, and thus its
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capacity for generating net cash inflows through its operations rather than by obtaining additional resources directly from investors and creditors.
OB19. Information about a reporting entity’s financial performance during a period also may indicate the extent to which events such as changes in market prices or interest rates have increased or decreased the entity’s economic resources and claims, thereby affecting the entity’s ability to generate net cash inflows.
Financial Performance Reflected by Past Cash Flows
OB20. Information about a reporting entity’s cash flows during a period also helps users to assess the entity’s ability to generate future net cash inflows. It indicates how the reporting entity obtains and spends cash, including information about its borrowing and repayment of debt, cash dividends or other cash distributions to investors, and other factors that may affect the entity’s liquidity or solvency. Information about cash flows helps users understand a reporting entity’s operations, evaluate its financing and investing activities, assess its liquidity or solvency, and interpret other information about financial performance.
Changes in Economic Resources and Claims Not Resulting from Financial Performance
OB21. A reporting entity’s economic resources and claims also may change for reasons other than financial performance, such as issuing additional ownership shares. Information about this type of change is necessary to give users a complete understanding of why the reporting entity’s economic resources and claims changed and the implications of those changes for its future financial performance.
This Concepts Statement was adopted by the unanimous vote of the five members of the Financial Accounting Standards Board:
Robert H. Herz, Chairman Thomas J. Linsmeier Leslie F. Seidman Marc A. Siegel Lawrence W. Smith
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APPENDIX: BASIS FOR CONCLUSIONS FOR CHAPTER 1
Introduction
BC1.1 This basis for conclusions summarizes considerations of the Financial Accounting Standards Board (the Board) in reaching the conclusions in Chapter 1, The Objective of General Purpose Financial Reporting. It includes reasons for accepting some alternatives and rejecting others. Individual Board members gave greater weight to some factors than to others. BC1.2 The Board developed this chapter jointly with the International Accounting Standards Board (IASB). Consequently, this basis for conclusions also includes some references to the IASB’s literature. Background BC1.3 The Board began the process of developing the objective of financial reporting by reviewing its own framework and concepts as well as those of other standard setters. In July 2006, the Board published for public comment a Discussion Paper on this topic. That same paper also was published by the IASB. The Board and the IASB received 179 responses. In its redeliberations of the issues on this topic, the Board considered all of the comments received and information gained from other outreach initiatives. In May 2008, the Board and the IASB jointly published an Exposure Draft. The Boards received 142 responses. The Board reconsidered all of the issues. This document is the result of those reconsiderations.
General Purpose Financial Reporting
BC1.4 Consistent with the Board’s responsibilities, the Conceptual Framework establishes an objective of financial reporting and not just of financial statements. Financial statements are a central part of financial reporting, and most of the issues that the Board addresses involve financial statements. Although the scope of FASB Concepts Statement No. 1, Objectives of Financial Reporting by Business Enterprises, was financial reporting, the other FASB Concepts Statements focused on financial statements. The scope of the IASB’s Framework for the Preparation and Presentation of Financial Statements, which was published by the IASB’s predecessor body in 1989 (hereinafter called Framework (1989)), dealt with financial statements only. Therefore, for both Boards the scope of the Conceptual Framework is broader.
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BC1.5 Some constituents suggested that advances in technology may make general purpose financial reporting obsolete. New technologies, for example the use of eXtensible Business Reporting Language (XBRL), may make it practicable in the future for reporting entities either to prepare or to make available the information necessary for different users to assemble different financial reports to meet their individual information needs. BC1.6 To provide different reports for different users or to make available all of the information that users would need to assemble their own custom-designed reports would be expensive. Requiring users of financial information to assemble their own reports also might be unreasonable because many users would need to have a greater understanding of accounting than they have now. Therefore, the Board concluded for now that a general purpose financial report is still the most efficient and effective way to meet the information needs of a variety of users. BC1.7 In the Discussion Paper, the Board used the term general purpose external financial reporting. External was intended to convey that internal users such as management were not the intended beneficiaries for general purpose financial reporting as established by the Board. During redeliberations, the Board concluded that this term was redundant. Therefore, this chapter uses general purpose financial reporting.
Financial Reporting of the Reporting Entity
BC1.8 Some respondents to the Exposure Draft said that the reporting entity is not separate from its equity investors or a subset of those equity investors. This view has its roots in the days when most businesses were sole proprietorships and partnerships that were managed by their owners who had unlimited liability for the debts incurred in the cours